FDI in multi-brand retail trading isn't unconstitutional or illegal - SC
CL : On matters affecting policy, this Court does not interfere unless the policy is unconstitutional or contrary to the statutory provisions or arbitrary or irrational or in abuse of power. The impugned policy that allows FDI up to 51% in Multi-Brand Retail Trading does not appear to suffer from any of these vices
Facts
• Petitioner had filed a writ petition praying for quashing Press Note Nos. 4, 5,6,7 and 8 of the 2012 series dated 20-09-2012 being unconstitutional and without any authority of law.
• By these Press Notes, the policy of Foreign Direct Investment (FDI) in Single-Brand Product Retail Trading, Multi-Brand Retail Trading, Air Transport Services, Broadcasting Carriage Services and Power Exchanges has been reviewed.
Held
• By the 2012 Regulations, Reserve Bank of India in exercise of the powers conferred by clause (b) of sub-section (3) of section 6 and section 47 of the Foreign Exchange Management Act, 1999 ("FEMA"), has made amendments to the 2000 Regulations.
• There is no challenge to the 2012 Regulations. In the absence of any challenge to the 2012 Regulations, the contention of the petitioner that Press Note Nos. 4,5,6,7 & 8 (2012 Series) dated 20th September, 2012 have no force of law, does not survive for any scrutiny.
• The views on the efficacy of a government policy and the objectives such policy seeks to achieve may differ.
•The counter-view(s) may have some merit but under our Constitution, the executive has been accorded primary responsibility for the formulation of governmental policy.
• The executive function comprises both the determination of policy as well as carrying it into execution.
• If the Government of the day after due reflection, consideration and deliberation feels that by allowing FDI up to 51% in Multi-Brand Retail Trading, the country's economy will grow and it will facilitate better access to the market for the producer of goods and enhance the employment potential, then it is not open for the Court to go into merits and demerits of such policy.
• On matters affecting policy, this Court does not interfere unless the policy is unconstitutional or contrary to the statutory provisions or arbitrary or irrational or in abuse of power.
• The impugned policy that allows FDI up to 51% in Multi-Brand Retail Trading does not appear to suffer from any of these vices.
• The competence of the Central Government to formulate a policy relating to investment by a non-resident entity/person resident outside India, in the capital of an Indian company is beyond doubt.
• The Reserve Bank of India (RBI) is empowered to prohibit, restrict or regulate various types of foreign exchange transactions, including FDI, in India by means of necessary regulations. RBI Regulates foreign investment in India in accordance with Government of India's policy.
• In the result, writ petition dismissed with no order as to costs
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[2013] 33 taxmann.com 33 (SC)
SUPREME COURT OF INDIA
Manohar Lal Sharma
v.
Union of India
R.M. Lodha, Madan B. Lokur AND Kurian Joseph, JJ.
Writ Petition (c) No. 417 of 2012
MAY 1, 2013
ORDER
1. We have heard Mr. Manohar Lal Sharma - petitioner in person and Mr. Goolam E. Vahanvati, learned Attorney General. We have also heard Mr. Vikramjit Banerjee, learned counsel for the intervenor - Swadeshi Jagaran Foundation in I.A. No. 2 of 2012.
2. Mr. Manohar Lal Sharma - petitioner in person prays for withdrawal of the rejoinder-affidavit in its entirety in view of the objectionable statements contained therein. We allow him to do so. It is directed that no part of the rejoinder-affidavit shall be treated as part of the record.
3. In the Writ Petition, the petitioner has prayed for quashing Press Note Nos. 4,5,6,7 and 8 of (2012 Series) dated 20th September, 2012 being unconstitutional and without any authority of law.
4. By these Press Notes, the policy of Foreign Direct Investment (FDI) in Single-Brand Product Retail Trading, Multi-Brand Retail Trading, Air Transport Services, Broadcasting Carriage Services and Power Exchanges has been reviewed. In the forwarding circular, it is mentioned in para 5 that necessary amendments to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (for short "Regulations, 2000) are being notified separately.
5. When the matter came up for consideration on 15.10.2012, learned Attorney General submitted that the process for necessary amendments to Regulations 2000 by the Reserve Bank of India was on and that necessary amendments in Regulations 2000 would be made soon.
6. On 5.11.2012, learned Attorney General placed for consideration of the Court, a copy of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Third Amendment) Regulations, 2012 (for short "2012 Regulations") published in the Gazette of India - Extraordinary on October 30, 2012.
7. By the 2012 Regulations, Reserve Bank of India in exercise of the powers conferred by clause (b) of sub-section (3) of Section 6 and Section 47 of the Foreign Exchange Management Act, 1999 (for short "FEMA"), has made amendments to the 2000 Regulations.
8. There is no challenge to the 2012 Regulations. In the absence of any challenge to the 2012 Regulations, the contention of the petitioner that Press Note Nos. 4,5,6,7 & 8 (2012 Series) dated 20th September, 2012 have no force of law, does not survive for any scrutiny.
9. Be that as it may. We have carefully considered the submissions of the petitioner and intervenor that the impugned FDI Policy is not founded on any material obtained from the government agency and no extensive consultation was made before formulation of the impugned Policy.
10. In the Counter-affidavit filed by the Union of India, the benefits of FDI in Multi-Brand Retail have been enumerated. The impugned FDI policy have twin objectives, (one) benefit the consumer by enlarging the choice of purchase at more affordable prices; and (two) eradicating the traditional trade intermediaries/middlemen to facilitate better access to the market (ultimate retailer) for the producer of goods.
11. It is stated that the amended FDI policy will generate employment, improve infrastructure and provide better quality products. The farmers will benefit significantly from the option of direct sales to organized retailers. In this regard, the Central Government has relied upon the study commissioned by the World Bank indicating that profit realization for farmers selling directly to organized retailers is about 60% higher than that received from selling in the Mandi. The views in the study commissioned by the World Bank are said to be supported by the findings of a study instituted by the Government of India on the subject of "Impact of Organized Retailing on the Unorganized Sector" through the Indian Council for research on International Economic Relations (ICRIER) submitted in May, 2008. According to ICRIER report, unorganized and organized retail not only co-exist, but also grow substantially in size.
12. The salient features of the FDI Policy on Multi-Brand Retail Trading are also indicated in the counter-affidavit. The policy mandates at least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian 'small industries' which have a total investment in plant & machinery not exceeding US $ 1.00 million. It also provides that retail sales outlets may be set up only in cities with a population of more than 10 lakhs as per 2011 Census and may also cover an area of 10 Kms around the municipal/urban agglomeration limits of such cities. In States/Union Territories not having cities with population of more than 10 lakhs as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 Kms around the municipal/urban agglomeration limits of such cities.
13. We find that impugned policy is only an enabling policy and the State Governments/Union Territories are free to take their own decisions in regard to implementation of the policy in keeping with local conditions. It is, thus, left to the choice of the State Governments/Union Territories whether or not to implement the policy to allow FDI up to 51% in Multi-Brand Retail Trading.
14. The views on the efficacy of a government policy and the objectives such policy seeks to achieve may differ. The counter-view(s) may have some merit but under our Constitution, the executive has been accorded primary responsibility for the formulation of governmental policy. The executive function comprises both the determination of policy as well as carrying it into execution. If the Government of the day after due reflection, consideration and deliberation feels that by allowing FDI up to 51% in Multi-Brand Retail Trading, the country's economy will grow and it will facilitate better access to the market for the producer of goods and enhance the employment potential, then in our view, it is not open for the Court to go into merits and demerits of such policy.
15. On matters affecting policy, this Court does not interfere unless the policy is unconstitutional or contrary to the statutory provisions or arbitrary or irrational or in abuse of power. The impugned policy that allows FDI up to 51% in Multi-Brand Retail Trading does not appear to suffer from any of these vices.
16. Notably, the Department of Industrial Policy and Promotion (DIPP) as per the Allocation of Business Rules, 1961 is allocated the subject of 'Direct foreign and non-resident investment in industrial and service projects, excluding functions entrusted to the Ministry of Overseas Indian Affairs'. Seen thus, the DIPP is empowered to make policy pronouncements on FDI. There is no merit in the submission of the petitioner that Central Government has no authority or competence to formulate FDI Policy. The competence of the Central Government to formulate a policy relating to investment by a non-resident entity/person resident outside India, in the capital of an Indian company is beyond doubt. The Reserve Bank of India (RBI) is empowered to prohibit, restrict or regulate various types of foreign exchange transactions, including FDI, in India by means of necessary regulations. RBI Regulates foreign investment in India in accordance with Government of India's policy.
17. Writ Petition is dismissed with no order as to costs. Interlocutory Applications stand disposed of.
Rental income from building constructed by assessee on a leasehold land is income from house property
IT : Where assessee having taken land on lease, constructed a building thereon and let it out on hire, assessee being owner of said building, rental income received by it was to be taxed as 'Income from house property'
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[2013] 33 taxmann.com 35 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'B'
J.B. Estates
v.
Income-tax Officer, Ward 5(1), Hyderabad*
SANJAY ARORA, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
IT APPEAL NO. 1974 (HYD.) OF 2011
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
OCTOBER 12, 2012
Section 22, read with sections 24 and 28(i), of the Income-tax Act, 1961 - Income from house property - Chargeable as [Leasehold rights] - Assessment year 2008-09 - Assessee-firm was engaged in construction of residential and commercial complex - It took a piece of land on lease from its partner and constructed building thereon - A portion of said building was let out to various tenants - Assessee claimed that rental income received from said building was assessable as business income - Revenue authorities, however, taxed rental income as income from house property - Whether since assessee had leasehold rights in land, it had to be considered as owner of building constructed thereon and, therefore, income derived as rent from such building was assessable as income from property and not as business income - Held, yes [Para 5.1] [In favour of revenue]
CASES REFERRED TO
S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) (para 3), CIT v. Bhoopalan Commercial Complex & Industries (P.) Ltd. [2003] 262 ITR 517/130 Taxman 338 (Kar.) (para 3), Sultan Bros. (P.) Ltd v. CIT [1964] 51 ITR 353(SC) (para 3), Shambhu Investments (P.) Ltd. v. CIT [2003] 263 ITR 143/129 Taxman 70 (SC) (para 3), CIT v. Chennai Properties & Investments Ltd. [2004] 266 ITR 685/136 Taxman 207 (Mad) (para 3), CIT v. Phabiomal & Sons [1986] 158 ITR 773/[1985] 21 Taxman 200 (AP) (para 3), ITO v. Suseelaram Enterprises [2002] 83 ITD 372 (Hyd) (para 5.1) and D.R. Puttana Sons (P.) Ltd. v. CIT [1986] 162 ITR 468/29 Taxman 158 (Kar.) (para 5.1).
B. Satyanarayana Murthy for the Appellant. Smt. Amisha S. Gupta for the Respondent.
ORDER
Sanjay Arora, Accountant Member - This is an Appeal by the Assessee directed against the Order by the Commissioner of Income-tax (Appeals)-V, Hyderabad ('CIT(A)' for short) dated 17/10/2011, dismissing the assessee's appeal contesting its assessment under section 143(3) of the Income-tax Act, 1961 ('Act' hereinafter) vide order dated 31/12/2010 for assessment year 2008-09, determining the income of the assessee at Rs.89,84,921/-.
2. Opening the arguments on behalf of the assessee, it was submitted by the learned Authorized Representative (AR), that though the assessee was aggrieved by the assessment and, accordingly, raised both the principal issues arising out of its assessment before the first appellate authority, i.e., the assessment of rental income (Rs. 72.16 lakhs) as income from house property as against business income (Issue No.1) and disallowance of interest paid (Rs. 70.44 lakhs) on borrowed capital (Issue No.2), it is not pursuing the first issue before the Tribunal and, accordingly, Grounds No.2 to 7 of the Memorandum of Appeal are not pressed, making an endorsement to this effect in the appeal file (original), with Ground No.1 being general in nature, warranting no adjudication. The only major issue, therefore, that survives is the one raised per Grounds No.8 to 10, i.e., qua the second issue supra.
3. It shall, at this stage, be relevant to recount the facts of the case in brief. The assessee is a firm constituted on 01.4.2005, by and among eight partners, besides admitting a minor to the benefits of the partnership. The assessee's principal business, as per the recital in the partnership deed (copy on record), is in real estate by way of construction of residential and/or commercial complexes. Toward the same, the assessee took on lease on 27.4.2005 land admeasuring 1070 sq. yards at Mahatma Gandhi Road (Bandar Road), Labbipet, Vijayawada from Shri J.Surya Prakash, partner, for a period of nine years at a lease rental of Rs. 2.50 lakhs per annum. Borrowings were made from various banks for the construction of a commercial complex thereon, which is stated to have been completed by March, 2006. Portions of the said building are, again, stated to have been let out to various tenants for different periods. In addition, the assessee acquired property at White House, Begumpet, Hyderabad and another at Aditya Enclave, Ameerpet, Hyderabad, and land at Gachibowli. Rental income was received from all the three house properties, i.e., except the land at Gachibowli. The assessee, relying on the decision in the case of S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700(SC), sought the assessment of its entire income, which, besides rental income, included interest income (Rs. 4.89 lakhs), compensation (Rs. 36 lakhs) and car parking charges (Rs.0.66 lakhs), as business income; and returned a loss of Rs. 3,25,060 from business (vide return of income filed on 30.9.2008). The AO, in the assessment proceedings, found that all the properties were purchased by Shri J. Suryaprakash, partner, in his own name, of which the Vijayawada property was leased to the assessee, who was thus not the owner but a lessee thereof. Further, whatever be the principal object of the firm, rental income from house property would only stand to be assessed as per the provisions of the Act, i.e., u/s.22, as income from house property. In respect of leasehold property at Vijayawada, no lease rental was paid. The decision in the case of S.G. Mercantile Corpn. (P.) Ltd. (supra), which is in fact under the 1922 Act, was not applicable in the facts and circumstances of the case. He, therefore, relying on the decision in the case of CIT v. Bhoopalan Commercial Complex & Industries P. Ltd. [2003] 262 ITR 517/130 Taxman 338 (Kar), brought the rental income to tax u/s. 22 of the Act. Further, the interest paid (Rs. 70,43,823) to banks (SBI and Axis Bank) was only on OD accounts in the name of Sh. J. Suryaprakash, and not qua housing loans. The same, taken by the partner, as an overdraft facility, could not be treated as housing loans. Further, there is no proof of the borrowed capital having been utilized for the purpose of construction. The said partner only had constructed the house properties by taking loans from the bank/s. The rental income was being offered in the hands of the firm to avail of the tax benefit as business income, i.e., by setting off the expenses; the firm reporting a loss. It could not, thus, be allowed deduction for interest paid. The other incomes, which include compensation and interest, were only assessable u/s. 56 of the Act as income from other sources. The same found confirmation in appeal and for the same reason(s), with the ld. CIT(A) relying on several decisions, viz. Sultan Bro. (P.) Ltd v. CIT [1964] 51 ITR 353 (SC); Shambhu Investments (P.) Ltd. v. CIT [2003] 263 ITR 143/129 Taxman 70 (SC); CIT v. Chennai Properties & Investments Ltd. [2004] 266 ITR 685/136 Taxman 202 (Mad); and CIT v. Phabiomal & Sons [1986] 158 ITR 773/[1985] 21 Taxman 200 (AP) qua the first issue, i.e., the head of income under which rental income is to be assessed. Aggrieved, the assessee is in appeal.
4.1 The ld. AR would, before us, submit that all the properties though purchased and registered in the name of Shri J. Surya Prakash, partner, are so held only for and on behalf of the firm, duly reflected in its account and, thus, its Balance Sheet as at the year-end under the head 'fixed assets' (copy on record/PB pages 23 to 40). It is well settled that a partner can hold the partnership property in his name; the firm having no legal existence, separate and distinct from the persons constituting it for the time being. Similarly, the loans assumed, though again in the name of the said partner, are in effect and substance liabilities of the assessee-firm. The same had been so assumed, as these are on the security of the said partner's (an erstwhile NRI) personal FDRs with the lender banks, which entail a lower rate of interest, i.e., vis-a-vis the housing loans/commercial loans for property.
Further, the capital borrowed has only been utilized toward acquisition of the property(ies), which is even otherwise patent from the assessee's Balance Sheet, reflecting, similarly, all the loans. However, when it was pointed out to him by the Bench that the assessee's Balance Sheet also reflected 'current assets' and debit balance in the 'Profit & Loss Account', i.e., at Rs.411.10 lakhs and Rs.51.22 lakhs respectively (PB page 23), so that capital to that extent was definitely not utilized for acquiring or constructing house property(ies), he fairly conceded to the same, stating that the matter would, therefore, need to be remitted back to the file of the AO for determining the extent of the relevant utilization of the borrowed capital.
4.2 The learned Departmental Representative (DR), on the other hand, relied on the orders of the authorities below.
5. We have heard the parties, and perused the materials on record.
5.1 The first thing that we observe is the inherent contradiction in the Revenue's stand, even though the same is rendered as of little consequence in view of the assessee relinquishing its claim qua the rental income being assessable u/s. 28 of the Act, and conceding to it being so as 'income from house property'. This is as it holds the assessee-firm as being not the owner of the relevant house properties, but belonging to the partner, Shri J. Surya Prakash, in his personal (individual) capacity. Ownership of property is a prerequisite for the assessment of the rental income therefrom (or its annual value) u/s. 22 of the Act. In fact, even the assessee, we observe, adopts an inconsistent stand. If the different house properties, or at least Vijayawada property, is the property of the firm, where is the question of it being leased to it by the partner (owner) or of the firm holding leasehold rights in its respect. Schedule D to the Balance Sheet, i.e., Fixed Assets (PB page 35) clearly depicts lease-hold building, contradicting the assessee's claim/s. Further on, the leasehold land, i.e., on which the said building stands constructed, is, under such circumstances, an off the Balance Sheet item and, thus, not accounted for, refurbishing the fact of it being only a lease-hold asset as far as the assessee-firm is concerned. The assessee, as afore-stated, has conceded to the rental income as being assessable u/s. 22 of the Act and, further has neither paid any lease rent on the leased property for the year; nor incurred any liability in its respect, that is, going by the Balance Sheet as at the end of the year, which purports to reflect truly and fairly its state of affairs. Further, the Revenue, with reference to the order in the case of ITO v. Suseelaram Enterprises [2002] 83 ITD 372 (Hyd), and which further draws on the decision in the case of D.R. Puttana Sons (P.) Ltd. v. CIT [1986] 162 ITR 468/29 Taxman 158 (Kar), holds that even qua a leased asset (land), so that the assessee only has leasehold rights therein; it has to be considered as the owner of the building constructed thereon by it and, accordingly, income derived by way of rent from such building is assessable as income from property and not as business income. The said decision also considers and in fact relies on that in the case of S.G. Mercantile Corp. (P.) Ltd. (supra). In view of the foregoing, the stand of the assessee and that of the Revenue, despite their inherent contradictions, converging, the rental income from the house property, including the leased building at Vijayawada, is assessable u/s. 22 of the Act, as income from house property.
5.2 This, thus, leaves us with only the second principal issue, i.e., the validity of the assessee's claim qua deduction of interest on bank loans u/s. 24 of the Act, and toward which the assessee has again fairly conceded for remission. We find much merit in the assessee's stand. This is as firstly the Revenue's stand is ambivalent and, therefore, cannot be accepted. Once the house property, the annual value of which is subject to tax u/s. 22 r/w s. 23, interest on capital borrowed, where utilized for acquisition, construction, repair, renewal or reconstruction of the property, has to be allowed as deduction under sec. 24 in computing the income under the head 'income from house property'. The only rider would be that the acquisition, construction, etc. stands completed during the relevant previous year, as the interest for the period prior thereto would stand to be allowed only in five equal installments, beginning with the year of such completion, and the four immediately succeeding years. The matter, thus, insofar as the instant case is concerned, works down to returning a finding as to the extent of such utilization, rather than on the qualification for deduction of the interest paid by the assessee on such capital. The fact of the capital borrowed, which we find to have been categorized by the assessee under the heads 'secured loans' and 'unsecured loans', as well as its utilization toward house property(ies), is borne out by the assessee's accounts, the financial position at the year-end finding reflection per the Balance Sheet drawn at that date (PB pages 23 to 40). As the loans/borrowings would only have been assumed/made at different times, and utilization also presumably through a common pool of funds, i.e., including those flowing by way of current liabilities, which are primarily in the form of advance rent, accumulated/routed, through a current account/s with a bank/s, the matter would necessarily require being restored back to the file of the AO for determining the amount of interest in relation to the borrowed capital utilized toward the relevant house property(ies). The AO shall adjudicate the same by rendering definite findings of fact; the matter being purely factual, with the qualifying interest amount subject to variation from year to year. We decide accordingly.
6. No specific argument was advanced by the ld. AR qua the assessee's Ground No.11, except by reiterating what is stated therein, i.e., that the interest and other incomes assessable u/s. 56 would require being adjusted against the interest payable by the firm.
We fail to see how? These are separate incomes, and do not in any manner impact the interest payable on the borrowed capital utilized for/toward house property/s and, thus, deductible u/s. 24 of the Act. Only the sums specified u/s. 57, where shown so to qualify, would stand to be deducted against income assessable u/s. 56. The said ground is accordingly dismissed.
7. In the result, the assessee's appeal is partly allowed for statistical purposes.
Sunil *In favour of revenue.
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